Jan 23, 2010

Big jump for InterOil shares

INTEROIL share prices took another big leap up last Thursday on the New York Stock Exchange on announcement that its Antelop-2 appraisal well had encountered oil shows.

A statement on the oil shows was released to the New York Stock Exchange (NYSE) on Wednesday night and to the Port Moresby Stock Exchange at 10am yesterday. Local investors are unmoved by the announcements and the PomSOX prices remain at K90/ share which is equivalent to $US33 - the NYSE price in May 2009.
The shares jumped 12 percent to trade at $US81 (K228) per share on the announcement making it one of the fastest growing stocks on the NYSE. Last year the shares quadrupled from about $30 (K84.5) to over $70 (K197) by the end of the year in reaction to various pronouncements by the company. Among the reports to the NYSE were the first world-record flow of 385 million cubic feet of gas per day at Antelope-1 and the next record breaker of 705mcf/day in Antelope-2.

One of the market analysis companies, Raymond James, which consistently follows InterOil's performance said yesterday: "This morning, InterOil announced the confirmation of oil shows from its Antelope-2 appraisal well. The obvious question is: Does this amount to a commercial oil discovery? Additional testing will be required to determine this, which could take up to a month or even longer."

It said the company had its sights set on drilling laterally into the potential oil leg, a move that should provide a far clearer glimpse at this lower, liquids-rich zone.

" After IOC shares reached an all-time high two weeks ago, a fairly neutral drilling update took some of the wind out of its sails and sent the shares drifting lower - a natural result of some profit-taking in the face of apparently inflated market expectations. Today's news release has once again perked investors' ears, but what has really changed?"

" As it stands, this confirmation of oil shows essentially restates what the market has already known from the days of Antelope-1. While confirmation of oil commerciality would certainly be a "game changer" for the story - in that it would enable much more rapid cash flow generation relative to liquids-stripping, to say nothing of LNG, since the oil could be shipped by barge directly to the company's refinery - we would still caution investors from calling this an oil discovery just yet," it said.

"Let's rewind back to the Antelope-1 sidetrack, in which InterOil encountered a potential oil leg spanning nearly 300 feet in height. Oil was encountered in three separate Antelope-1 drill stem tests (DSTs)."
"That said, the company encountered difficulty when testing this lower section in Antelope-1 given the tight nature, limited porosity, of the rock within that particular interval," it said.

"In other words, the company was unable to obtain a clear picture of the heavy condensate levels (let alone the oil leg) at the base of the reservoir."

But this time round, according to Raymond James, InterOil's drill pit was getting deeper into better porosity levels throughout its drilling at Antelope-2. "Furthermore, the presence of dolomite throughout the entire upper reservoir section bodes well for the porosity levels in the lower, liquids-rich zone. Bottom line, we will have to wait and see, but the signs thus far have been positive," it said.

"We readily acknowledge that the confirmation of a commercial oil leg could lead to meaningful upstream earnings in the relatively near term versus the extensive timeline set forth for the proposed LNG facility - with first production not expected until at least late 2014. On the other hand, there are obvious execution risks in a 'well watching story,' as exhibited by the sell-off over the past two weeks."

" While recognizing the longer-term valuation upside, we believe it remains essential for investors to recognize that the operational and timing risks as the upstream assets and the LNG plant are developed over the next five-plus years have not disappeared. We maintain our Market Perform rating," it said.

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